Central Bankers may diversify U.S. dollar reserves into gold.
Gold closed up $12 or up 2% at close of the week. Since the beginning of the year yellow metal has gained close to 20% and in the last 52 weeks has added 46%. Market analysts are quick to predict gold’s climb to $700 in the coming months. Several factors are conspiring to convince traders that gold will continue to keep climbing. Central banks around the world need to diversify their foreign reserves holding. Sweden announced today that it will begin to diversify its holdings away from U.S. dollar. Sweden’s Central Bank reported that it has reduced its dollar holding to 20% from 37% and raised its holding in Euro from 37% to 50%. South Korean Central Bank made similar commitment to diversify its holding as well in February of last year.

China, Japan, Taiwan, Singapore and India are one of the largest holders of U.S. dollar. China and Japan will soon have to diversify their holdings. The current trade surplus enjoyed by Asian nations has increased their vulnerability to U.S. dollar price volatility. Total U.S. dollar reserve of these five nations is now approaching $1.6 trillion. Middle Eastern countries have established similar U.S. dollar reserve of more than $500 billion and Russia now holds $220 billion in its foreign currency and gold portfolio. Russian Finance Minister Alexei Kudrin questioned the U.S. dollar’s status as “absolute” reserve at the Finance Minister’s meeting among G7 countries in Washington. He went on to add that considering the volatility in the U.S. dollar value and size of its trade deficit with its trading partners in the world, the U.S. dollar does not deserve such a status.

The U.S. dollar fell 30% among a basket of foreign currencies between 2002 and 2004 on widening trade deficit. The deficit since then has grown more. In the year 2005 annual trade deficit has grown to $725 billion and is likely to cross $900 billion this year, yet dollar rallied in the last eighteen months. Federal Reserve Bank has raised interest rates fifteen times in the last two years supporting the advance of dollar. Once interest rate charged by the Fed crosses 6.5% the future of dollar may be uncertain. Then depreciation in dollar may accelerate at a rapid rate if large trade deficit persists. If current oil prices are maintained for the next eighteen months U.S. dollar is certain to take a hit if Fed fails to hike rates.

According to the latest IMF data the dollar forms more than 65% of total reserves among Central Bankers and euro constitutes 25%. According to World Gold Council 90% of gold consumption is driven by demand for jewelry and industrial needs and the rest is by the demand from investors. Recently demand for investors has jumped from historic average of 400 tons to 650 tons and is rising at rapid rate.

6:00PM Oil at $75, gold at $635 and copper at $3.14
Iran’s hawkish comments that rich nations with billions of dollars in income can pay ‘real oil price’, boosted oil to a new high. Barrel of oil now trades above $75. Iran, fourth largest oil exporter, exports 3.9 million bpd and is a member of OPEC cartel with daily production of 27.81 millions of barrel per day. Iranian President did not suggest what is appropriate price of oil but Iranian lawmakers in the past have suggested a price north of $100 per barrel. Gasoline price are on the move at pump stations across the nation. According to the AAA.com web site of the largest motorist organization gasoline price at the pump are up 12% for the month and whopping 60% from a year ago. Last registered high price of $3.05 a gallon during Hurricanes Katrina and Wilma has been shattered in many regions of the country.

Several market analysts project that a new may be registered during the driving season in Memorial Day weekend. Nigerian rebel have refused to negotiate, Iran is suggesting higher prices and U.S., China and India continue to grow their oil demand. Oil price during this hurricane season may spike and score a new high if offshore-refineries are damaged for a sustained period of time. Even after six months of Katrina, according Minerals Management Services, a government agency, 22% of nations of Gulf of Mexico oil facility and 13% of natural gas producing capacity remains closed. In the last eight 27% of oil production and 20% gas production has been lost.

4:30PM Earnings, Oil and gold dominate trading in stocks.

-Dow up 4.56%, Nasdaq down 19.69 and S&P down 0.18 points.
-Crude oil up $1.48 per barrel to $75.17 and gasoline closed up 3 cents to $2.20.
-Gold up $12.40 to $635.50 per ounce and silver up 44 cents to $12.96.
-Copper reached a new high to $3.14 up 18 cents.
-Yield on ten year bond rose to 5.010% and 30-year bonds to 5.095%.

Market averages rose early in the morning trading hours but lost momentum as tech stock declined and oil rose above $75 a barrel. Gold, silver rose but copper closed at a record high. Market averages meandered for the rest of the day. In New York and Nasdaq trading volume crossed 2.3 million shares. On New York Stock Exchange 290 stocks reached new highs and 88 stocks reached new lows. On Nasdaq 222 stocks reached new highs and 34 stocks reached new lows.

Earnings dominated trading sentiment for the rest of the day. Google rose as much as 8% before settling at 5.3% on 60% earnings growth and 79% revenue growth in the first quarter of this year. 3M reported earnings per share of $1.17 beating the estimate of $1.13. The stocks rose 3% at close. General Motors (GM) rose 3.8% after rising 10% on Thursday and Ford Motor lost 8% on weak earnings. Dell and Hewlett Packard lost after Citigroup lowered its rating to “Sell” on Dell. Dell lost 4.4% and Hewlett Packard lost 3% at close.

Getty Images, SanDisk and Satyam dropped on earnings news. Getty Images (GYI) dropped 13% on earnings miss of a penny and lowered guidance for the rest of the year. The company also mentioned during the conference call that market environment is too “promotional” and gross margin will suffer for the rest of the year.

SanDisk (SNDK) closed 8% lower on earnings worries and lower than expected gross margin. The company also warned that the average selling price for its removable memory products will keep declining at 20% or more every quarter for the rest of the year. During the conference call the company also reiterated that in the second half of the year manufacturing capacity in the industry is likely to double for NAND type of flash memory.

Satyam Computer (SAY) lost 12% at close on lowered revenue and net margin guidance. The company reported earnings of 39 cents per ADS on revenue growth of 34% for the Q4. The company guidance of 24% to 26% in revenue growth and earnings growth of 20% to 22% spooked investors.

3:30PM Emerging markets remain a favorite destination of international investors.
Emerging markets closed mostly lower across the world but Korea, Mexico, Argentina, Philippines and Singapore gained during the day advancing close to 1% each. Emerging markets witnessed steady stream of fund flows from the domestic and international investors. Liquidity driven rally propelled many of these markets around the world to record levels. Indonesia, India, Russia and Mexico are trading at record levels.

India registered 7% gain for the week and was close to unchanged at close on Friday. Market dropped as much as 160 points at mid-day and recovered most of the losses on strong buying from domestic mutual funds. Metal stocks such as Tata Steel, Hindalco and Sterlite registered sterling gains in the week. Daily turnover in the market has steadily grown to $1.3 billion from $700 million in the beginning of the year. The Sensex Index in India is up more than 27% for the year.

Indonesia has scaled more than 25% gain for the year so far and has become one of the hottest destinations for the international investors. Funds have been pouring money as bond yields are one of the highest in the world. The index lost a fraction to close at 1,459. Bank Permata, Berlian Laju Tanker and AStra Agro Lestari rose more than 0.5% at close.

Russia closed lower as the main index RTS closed at 1,617 down 0.07% with daily turnover of $714 million. Market dropped more than 1.4% in the morning trading and made a recovery near close but oil and metals stocks rose. NorNickel and Sibneft closed up 1.5%. Russian Index is up 36% for the year so far.

Mexico and Argentina led advancers in Latin American region. Mexico closed up 0.8% and IPC index closed up at 21,140. The index has been recording new highs for the last three weeks as oil and copper prices have moved upwards in the international markets. The Bank of Mexico cut the overnight interest rate to 7% from 7.25% and lowered the rate for the ninth time in nine months. The Bank also signaled that more cuts are not likely in the near future. American Movil (AMX) and Femsa (FMX) rose a fraction but Cemex (CX) fell a fraction on earnings news. Grupo Mexico added 5% at close. Mexican index IPC has gained 400% in the last five years, 100% in last two years and 12% since the beginning of the year.

Argentina’s Merval Index gained 1.4% to close at 1,918 and close up 24% for the year and has averaged $29 million daily turnover for the year. Tenaris, the largest energy tube manufacturing company, closed up 4% to close at peso 69.40 and closed up $14 in New York to $230.80.

Brazil index Bovespa lost 0.4% to close at 39,774. Mining and oil stocks continued their ascent. The mining giant CVRD (RIO) rose 4% in New York trading to close at $51.50 and Petrobras in New York closed higher $2.65 to close $99.60.